In light on Paulson’s comments on Tuesday The Prince thought he would highlight a post he wrote the day before Paulson’s comments that predicted most of what he talked about with regards to regulating investment banks.  There are many regulatory changes coming and The Prince predicts four implications of the Fed’s moves in the Bear Stearns debacle that almost no one on Wall Street will like. 

Investment Bank Regulation is Changed Forever

Here is an excerpt from the piece:

After reading Mssr. Sorkin’s column, The Prince is convinced that by focusing on the intrigues of how the Fed called the shots on the offer, he is missing the long term implications of the Federal Reserve’s actions in the Bear Stearns debacle.  It is interesting that the Fed did not inform Bear of its plans to open the discount window the night it signed JP Morgan’s bid.  These actions clearly favor the argument that the Fed preferred the first bid, as Mssr. Sorkin points out.  The Prince couldn’t agree more with Sorkin when he states the fact that, “The Fed is officially in the deal-making business.”  But why is this problematic? 

Most of the stories about this mess have spoken vaguely about “moral hazard” and setting a precedent which will increase risk taking in the future etc.  Very few columnists, journalists, or bloggers have looked at what the actions of the Fed forebode for Investment Bank regulation going forward.  The Prince does not care what happens with the Bear Stearns takeover because the long-term implications of the actions taken by the Fed in this debacle are far more ominous and important.  Please allow The Prince to illustrate some of the most problematic implications.

Four main regulatory implications follow after the jump.

Investment Bank Regulation is Changed Forever

-The Prince